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NEW YORK, March 17 (IFR) - Colombia Telecomunicaciones (ColTel) is marketing a rare hybrid security that will provide a stiff test for investor appetite given the current state of play in the LatAm capital markets.
While ColTel is using the deal to bolster its balance sheet under new accounting standards, the trade is far from standard fare - and unlikely to be an especially easy sell to accounts.
Latin America has seen its fair share of hybrids from banks but only rarely from corporates, especially those like BB/BB rated ColTel that are sub-investment grade.
Perhaps in view of the difficulties, leads are marketing the deal far and wide, and will find out how much demand exists at the moment for such a deeply subordinated structure.
"Some of the banks have done it before but I don't think this is something that, especially in this market, investors would want to buy," one sell-side corporate analyst told IFR.
The Colombian government, which owns 30% of ColTel alongside a 70% stake held by Spain's Telefonica, made it mandatory for companies to switch international accounting standards to IFRS from GAAP, effective in 2015.
Under IFRS, ColTel must add some COP4.0trn (US$1.5bn) in legacy labor and pension costs from state-owned predecessor Telecom, which was liquidated in 2003, to its balance sheet.
But the switch will result in a drop in net shareholder equity to minus COP974bn, or US$407m, according to a copy of the bond's preliminary offering memorandum seen by IFR.
And under Colombian law, negative shareholder equity could trigger mandatory dissolution proceedings if it is not cured within 18 months after the board approves the results.
To mitigate that danger, ColTel is marketing a B+/B rated hybrid perpetual that will receive 100% equity treatment under IFRS rules and 50% equity treatment from rating agencies.
Fitch said the transaction will carry a first call in year five and expects the size to be around US$500m.
It is understood that the coupon, which is deferrable, will reset every five years at prevailing five-year mid-swaps plus the original issue spread and a 25bp step-up.
In 2035, an additional 275bp step-up would kick in unless the company has by then obtained an investment grade rating by S&P - which would postpone the punitive step-up to 2040.
Structuring advisors BBVA and HSBC, which are also acting as joint bookrunners alongside Citigroup and Credit Suisse, kicked off investor meetings in Bogota on Tuesday.
Further meetings this week are set for Santiago (Wednesday and Thursday), London and Singapore (Thursday), and Switzerland, Hong Kong and Lima on Friday.
Next week the roadshow will be in Boston, Los Angeles and Miami on Monday, and New York on Tuesday.
Among the investors being targeted are private banking accounts who are likely to favor the five-year call, given the strong incentives to exercise such an option.
While the corporate analyst said the trade could come "at a very high yield", that looks to be the cheapest option for ColTel given the potential dissolution risk.
It is the first corporate dollar hybrid out of the LatAm region since December 2013, when Chilean utility AES Gener priced a US$450m 8.375% 60-year non-call 5.5. (Reporting by Davide Scigliuzzo; Editing by Paul Kilby and Marc Carnegie)